President Clinton has decided to lift most of the economic sanctions imposed on India and Pakistan after their nuclear weapons tests last May to reward them for recent steps toward nuclear control agreements and to encourage them to do more, senior administration officials said yesterday.

Clinton notified the prime ministers of both countries by letter yesterday that he was exercising authority granted by Congress last month to waive the sanctions. Before Congress acted, the U.S. sanctions were inflexible and indefinite, a fact cited by U.S. officials and by India and Pakistan as an obstacle to productive negotiations.

Clinton's decision follows six months of intensive diplomacy by Deputy Secretary of State Strobe Talbott and other U.S. officials aimed at heading off a nuclear arms race in volatile South Asia.

As recently as Thursday, Talbott said the nuclear standoff between the South Asian rivals threatened "an apocalypse in the cradle of several of the world's great religions and civilizations. Even if they don't unleash that ultimate catastrophe, India and Pakistan are straining at the starting blocks of a ruinously expensive arms race."

Nevertheless, senior officials yesterday cited steps taken by both countries toward accommodation with the international arms control system, including voluntary moratoriums on further tests. They have also committed to adhering to the Comprehensive Test Ban Treaty by September, have begun taking part in negotiations on a treaty banning the production of fissile materials for weapons, and have resumed their direct dialogue about the disputed territory of Kashmir and held their first bilateral discussions on the nuclear issue, U.S. officials said.

In response, Clinton has decided to restore the authority of the U.S. Export-Import Bank, the Overseas Private Investment Corp. and the Trade Development Authority to participate in deals in both countries, U.S. officials said. In addition, Clinton will authorize the Pentagon to resume International Military Education and Training programs in both countries.

The U.S. sanctions and internationally mandated restrictions on funding by international development banks have had a marginal impact on India but have brought impoverished Pakistan to the brink of default on its international debt, U.S. officials said. For that reason, Clinton has also authorized U.S. officials to approve international bank loans and a debt restructuring agreement with the International Monetary Fund.

Earlier, Clinton had signed legislation exempting U.S. grain exports from a ban on U.S. commodity credit financing and had softened the sanctions to allow World Bank funding of humanitarian projects such as water supply facilities.

"No country would benefit from a financial collapse by Pakistan," a senior administration official said. "Implementation of this decision will require that Pakistan reach agreement on a credible reform program, including resolving the problems facing the independent power producers in Pakistan."

Left in place are bans on military equipment sales to both countries, restrictions on the export of U.S.-made "dual use" items that could have military applications, and U.S. objections -- which amount to a veto -- to development-project lending to India by the World Bank and other international lending institutions. There has never been a total ban on trade with or investment in either country.

India's nuclear tests in May, followed quickly by Pakistan's, threatened to undermine the entire framework of international nuclear arms control agreements. India challenged the legitimacy of the Nuclear Nonproliferation Treaty, which specifies that only the five declared nuclear powers -- the United States, Russia, China, France and Britain -- are allowed to possess nuclear weapons.

India angrily rejected entreaties from the five nuclear powers, insisting on its right to make its own security decisions. India developed its nuclear capability at least partly in response to perceived threats from China and rejected the argument that it was internationally acceptable for China to have nuclear weapons while India could not.

Administration officials said they hoped the relaxation of sanctions would encourage new positive steps during Talbott's next meeting with his Indian interlocutor, Jaswant Singh, in Rome on Nov. 19, and during the Dec. 2 visit here of Pakistani Prime Minister Nawaz Sharif. "We have said that positive actions on their parts in response to our nonproliferation concerns would result in positive actions on our part," a senior official said.

The United States is asking both countries to halt further production of fissile materials while the negotiations for a treaty banning it are under way, as well as for restraints on the deployment of intermediate-range ballistic missiles that could deliver nuclear warheads, a senior U.S. official said.

In India, a foreign ministry spokesman called the action "positive," and his Pakistani counterpart added, "It is a very welcome step," the Associated Press reported.